Europe split over debt crisis fund

12th January 2011, Comments 0 comments

A divided Europe wrestled Wednesday over how to tackle a debt drama threatening to take down Portugal as Germany and France rejected a plea for a rapid boost to a eurozone crisis fund.

Commission President Jose Manuel Barroso called for an increase in the size of the 440-billion-euro European Financial Stability Facility (EFSF) to reassure nervous markets the stability of the eurozone "is not in question."

"We believe that the financing capacity must be reinforced, the scope of activities of the EFSF should be widened," Barroso said.

"And in fact I see no reason why we should not take a decision on these matters at the latest by the next" European summit on February 4, he told a news conference on the launch of a new economic governance programme.

Barroso made the surprise plea after an unannounced meeting Tuesday with IMF chief Dominique Strauss-Kahn in Brussels, and a phone call with European Central Bank President Jean-Claude Trichet, who both share his views on the fund, an EU official told AFP on condition of anonymity.

But Berlin and Paris immediately hit the brakes, saying there was no need to expand the fund.

"The German government finds at the moment that it makes no sense, and first and foremost that it is unnecessary, to talk about expanding the rescue mechanism," government spokesman Steffen Seibert told reporters.

French government spokesman Francois Baroin said the fund was "sufficiently big to meet requests" and that it would not be on the agenda at a meeting of EU finance ministers next week.

The temporary fund was created last May to provide cover for countries in financial distress after Greece became the first eurozone country to be rescued from the threat of bankruptcy, followed by Ireland in November.

But analysts have repeatedly warned that the war-chest needs to be bigger to calm nervous markets concerned the debt crisis could spread to even larger economies such as Spain, Italy or Belgium.

Belgium, itself hit by higher borrowing costs due to a marathon political crisis, has called for the fund to be given "unlimited" resources.

Talk of boosting the EFSF came amid growing fears that Portugal might need a bailout, which the country has resisted.

In a test of Portugal's ability to remain financially independent, the country managed to raise 1.25 billion euros at a bond issue Wednesday which attracted strong demand.

European economic affairs commissioner Olli Rehn said talks were underway with EU states on the possibility of increasing the EFSF, which expires in 2013, and a mooted, permanent successor -- the European Stability Mechanism.

"We must ensure that the financial support mechanisms that were put in place last May are fit for the purpose," Rehn said.

He said discussions with member states about increasing the fund were "currently going on" and that "progress is being made."

The bailout facility's total capacity on paper is 750 billion euros (one trillion dollars) when contributions from the entire EU and the International Monetary Fund are added.

But the EFSF's effective funds are considerably less its 440 billion euros.

Its lending capacity is estimated at 250 billion euros as the EFSF in fact borrows money on the markets and in order to secure a top rating and low interest rates it must keep part of funds raised in reserve.

Europeans are weighing the possibility of bringing the EFSF's effective capacity up to 440 billion euros, which would mean a significant increase in the fund and guarantees from eurozone states, media reports said.

Another idea being invoked is to allow the fund to buy the public debt of troubled economies to ease the burden on the European Central Bank, which has been buying sovereign bonds to keep the rates of countries like Portugal low.

© 2011 AFP

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